Govt may push RBI to ease provisioning norms for insolvency accounts

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With banks burdened with a spike in bad loans and shortage of capital availability, the government may push the Reserve Bank of India (RBI) to help them in meeting capital requirements. The government will also look to ease provisioning norms for the loan accounts identified under the insolvency process.

While bankers have approached the banking regulator, the Indian Banks’ Association (IBA) has also made a representation to the government seeking a breather on the provisioning requirements which may hit the banks’ profitability given the capital constraints and weak credit growth at about 6 percent.

“We have made a representation and the government may look at it, otherwise it will be difficult for many banks to set aside that huge amount as provision. Our profitability could also take a hit as we have large exposures to many accounts. It also reduces the benchmarking of the value of the asset to find a new buyer,” said a senior State Bank of India official.

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In June, RBI had directed banks to set aside 50 percent of the loan amount as provisions for likely losses for all NPA accounts referred to the NCLT (National Company Law Tribunal) under the Insolvency and Bankruptcy Code. This provisioning should be 100 percent in cases that fail to get resolved under insolvency proceedings and are forced into liquidation.

The provisioning norms are currently applicable for the 12 cases referred to NCLT by RBI on June 13. In August, RBI sent out a second defaulter list to banks of about 28-30 accounts where 60 percent of the outstanding amount had turned NPAs as on June 30. The regulator told banks to resolve the cases by December 13, failing which they have to be taken up for bankruptcy proceedings.

Another large public sector bank executive said, “We have made provisions for the accounts we have classified as NPAs but for all insolvency accounts, the arbitrary provisioning requirements and forcing banks to file cases under insolvency will impact our profits.”

Further, the executive said that once a loan account goes for insolvency the clock starts ticking for a resolution to be brought about within 270 days. Hence, to quickly arrive at a solution, the hair-cut on such accounts could be huge, which is as good as a write-off of these loans. Hence, banks are wary of taking loan accounts to the NCLT for the insolvency proceedings.

It is estimated that banks may need additional provisioning of Rs 50,000 crore and a hair-cut of about 50 percent of the debt.

However, RBI Deputy Governor NS Vishwanathan recently said that such provisioning requirements are “nothing unusually large”.

An email sent to RBI did not get a response.

As per PTI reports based on Axis Bank’s post results interaction with analysts, the banking sector fears accretion of more than Rs 40,000 crore of bad loans to its books following classification of eight consortium accounts of Axis Bank as NPAs suggested by the RBI’s annual risk based supervision (RBS) exercise conducted for 2016-17.

Axis Bank had to reclassify 9 standard accounts as NPAs with divergence of Rs 5,632.80 crore in gross NPAs the bank at the end of March 2017. Of these, 8 accounts are part of consortium lending totaling loans worth Rs 40,000 crore.

“It is going to have an impact on all the consortium lenders. Banks have to reconcile these accounts as NPAs sooner or later. Reclassification by others may happen over two quarters,” Suresh Ganapathy of Macquarie Capital Securities said as per PTI reports. If they reclassify these assets as NPA banks will have to make provisioning accordingly that could impact their bottomline, he added.

According to the SBI official, the divergences could have been because of the interpretation of the RBI guidelines. Also, banks cannot ask the RBI for clarification while accounting of the loans. Only an RBI inspection can reveal that.

Banks are already battling NPAs worth about Rs 8.5 lakh crore, a majority of which is coming from the stressed sectors of power, steel, road infrastructure and textile sectors.

Karthik Srinivasan, Group Head, Financial Sector Ratings at ICRA ratings agency, said, “It shows that the time is still challenging for the banking sector for the next year or so. We should wait for more results. But capital challenges continue to remain as banks will need to raise external equity to meet the minimum capital requirements as well as the provisioning needs.”

ICRA’s estimate of capital requirement for banks, especially public sector banks at Rs 1.1-1.2 lakh crore is much higher than the government’s plan to infuse capital worth Rs 20,000 crore for two years.

Going by the second quarterly financial results of some banks, the stress on most banks’ balance sheets is here to stay.